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CBN raises banks’ net Forex trading position to 0.5%

By on January 24, 2015

The Central Bank of Nigeria (CBN) has once more reviewed upward the net foreign position of banks.

The central bank in its latest circular titled: “Utilisation of RDAS and interbank funds/review of the foreign exchange trading positions of banks,” stated that the net foreign exchange trading position has been reviewed from 0.1 per cent of shareholders’ funds unimpaired by losses, to 0.5 per cent of the shareholders’ funds unimpaired by losses.

Banks used to have a one per cent net open position to deal on the currency before the devaluation, but the central bank cancelled it to zero in December. Last week it allowed banks a 0.1 per cent net position but warned them against carry trades or speculative activity.

But the CBN in the circular signed by its DIrector, Trade and Exchange Department, CBN, Olakanmi Gbadamosi also stated that as part of its continuation of the review of developments in the forex market as well as to curb speculative demand in the market, both Retail Dutch Auction System (RDAS) and interbank funds should henceforth be used strictly for the funding of Letters of Credits, Bills for Collections and other invisible transactions, subject to appropriate documentation.

It added: “Consequently, RDAS and interbank funds should no longer be sold to BDCs and other authorised buyers. Meanwhile, the weekly sales of forex to BDCs will be sustained by the CBN based on the liquidity needs of the market.”

Currency dealers in Nigeria had on Wednesday agreed  to halt trading if there is a more than two per cent intra-day slide in the naira, which is being hit by the oil price slump and is at risk of speculative attacks.

Dealers had said they feared that if they did not act to curb the naira’s slide, the currency could head to N200 to the dollar, creating extreme volatility and adding to deteriorating liquidity conditions.  Like other emerging market currencies, the naira is also under pressure as the dollar strengthens on expectations the United States will soon raise interest rates.

The Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele said on Tuesday that the naira was “appropriately priced” and the bank would “not tolerate speculative attacks”.

Reuters stated that dealers have been suffering as the central bank has reduced their open positions in a bid to stabilise the currency after it was devalued by 8 percent against the dollar in November to protect the central bank’s foreign reserves. Banks can earn trading revenues when the naira is weak through carry trades, by borrowing the naira to buy dollars which they resell at a higher level to make a profit. That makes it difficult for genuine forex users to buy dollars when liquidity is tight.

 

[ThisDay]